Wednesday, September 28, 2011

Remember days of yore--when an MBA in finance accepted an offer from an investment bank, commercial bank, brokerage house, trading firm or insurance company in the spring of second year and thereafter embarked on a long career with one firm, one employer? Shortly after arriving at the firm, the MBA started a training program or entry position--with the expectations of earning promotions every few years and with sights on becoming a senior manager (at the same firm) at the apex of a productive, memorable career.

In those days, you had the luxury of failing or slipping up in performance (a few times, not often), as long as you showed drive, loyalty, commitment and some promise. Now and then, you could fail to win a deal, could lose a major client, or could report a decline in revenues. You were reprimanded slightly, gently coached, and learned from experience. You were confident you would get a second chance, and you envisioned a career lasting, oh, 15, 20 or more years.

What happened to those days? Times changed. The environment changed. Competition among financial institutions grew fierce. Regulation loosened some of the rules and guidelines. Commercial banks infringed on the turfs of investment banks. Insurance companies, boutique firms, and hedge funds butted heads among themselves and with bankers. Shareholders, boards of directors and investors, accustomed to 10-15% returns, suddenly sought 20-25% returns, even with dwindling opportunities. They demanded revenue increases, soaring earnings and steady upticks in share prices.

And they demanded it from quarter to quarter every year. From the chairman of the firm to the sector managing director to the vice president in a client unit or on a trading desk all the way to the newly hired MBA only a few months out of Stern, Darden, Haas, or Tuck, the mantra became: "What have you done for me lately?"

How can and how do MBAs, including those from Consortium schools, confront such daily pressures? How should they and how can they handle a culture where you are only as good as the last deal you've done, the last client you brought to the firm, the last trade you put on the books or the last investment you analyzed and endorsed?

The topsy-turvy environment of 2011 makes matters worse. While financial institutions of all kinds scramble to win business, keep clients and cut costs to remain profitable, uncertainty about markets, global issues in Europe, and a start-stop recovery in the U.S. heightens the pressure. Banks, in particular, still sit in frustrating meetings brainstorming on how to make money with Dodd-Frank and Basel III regulation whipping them from behind. In the midst of all this uncertainty and week-to-week chaos, somebody is always peering over everybody's shoulder to ask: What have you done lately to justify your existence here?

Will this be the norm going forward? Will this be common practice to manage professional talent? Will bankers, traders, researchers, salespersons and managers be evaluated from quarter to quarter based on their current contributions to earnings (and not based on a long-term value to the firm)? Will employees at financial institutions approach each work day as one to confront threats, hardships and enormous pressures to perform and achieve?

Or when market stability turns, along with some certainty of a sustained recovery, will financial institutions settle down and nurture long-term career paths for those who truly want to be around for a long time? There is risk in not doing so.

In unsettled markets and high-pressure situations (where compensation is too uncertain to offset daily anxiety and turmoil), talented professionals seek solace elsewhere. If the environment is unsatisfying and too threatening, they move on. They flee to smaller firms or more specialized outfits. They contemplate going on their own, setting up their own shops, boutiques or funds. Many bring their clients, strategies, and colleagues with them.

Others shop around for more comfortable roles or environments. If they go to work plastered with constant rumors of lay-offs or spin-offs of business units they work in or if they are subject to harsh demands to meet extraordinary business targets, they reach out to peer firms. They go where expectations are reasonable and where pressures are tolerable (or compensated for). They go across the street to the "other bank."

Younger professionals and newly minted MBAs may not have networks or contacts to pursue other opportunities yet. Many also want to stay put, because they want to spend the first few years learning and getting experience--in doing deals, in negotiating with clients, in tackling financial models, in managing people and in making tough business decisions.

Yet in an environment where some will tap them on shoulders and ask what have they done lately, it helps to have a survival plan. What can they do?

1. Keep, maintain and update a personal scorecard of accomplishments, achievements, deals, business wins, and successful projects. Be ready to present and explain it at any time, because, yes, in these times, your value to the firm is always under review.

As others assess your value (whether formally in appraisal meetings or informally in chatter during a coffee break), you want the review to be fair, objective, and up to date.

2. Understand what your weaknesses are and how they are perceived by others. Develop a short- and long-term plan to address them, and be ready to share the plan with supervisors and mentors. As others evaluate you, they may overlook what might be regarded as a glaring weakness, if they know you have plan to improve.

3. Always assess "what you bring to the table." Make sure to the table, you bring something important, useful, possibly money-generating, or valued highly in the short- and long-term. That may be access to clients, people and contacts. It may be specialized knowledge, new ideas, or an astounding understanding of financial models, markets, products, or regulation. For many recent MBA graduates, it may also be an intense, consistent work ethic, a willingness to get the job done no matter the obstacles (and of course during all hours of the night or weekend).

There is no fail-safe response to the question: What have you done for me lately? Sometimes a 20% increase in revenues won't do. Or winning the mandate from a new client to do a big, headline-garnering deal won't create a buzz among senior managers. Or creating a new product that clients will swarm toward may still be insufficient for those who ask these types of value questions.

Wednesday, September 21, 2011

The Federal Reserve said yesterday that it will shuffle $400 billion of its portfolio to try to drive down long-term interest rates and get the economy going. Is it going to work? I seriously doubt it!

The current economic situation is lack of confidence in the economy, in the government, and in the Euro debt crisis. Yields on U.S. government debt were already among the lowest on record, and investors drove them down further after the Fed announcement. The yield on the 10-year Treasury note, an indicator for mortgages and other long-term loans, closed at 1.86 percent, down from 1.93 percent the day before and the lowest since at least 1962. The US interest rate is already low, by lowering further won't make much difference.

If you look at Japan as an example, you will know this is not going to work for the American.

Focus on the revenue

There are actually two sides of the equation here that most economists do not see, the revenue side and the spending side that can drive the economy. However, because people are too used to the Keynesian and Monetary theories that focus on the spending side, they have neglected the most important source that can boost the economy - the revenue!

And how to get more revenue for the government? Taxation!

The US has the most millionnaires and billionnaires in the world, and the US has the most number of technology companies in the world that are rich source of tax revenue for the government. Even if the US government does not want to tax the companies, how about selling government bonds to these cash rich companies?

Wednesday, September 14, 2011

Summer, 2011, has marked a rambunctious time of swirls and volatility in equity markets. It feels like 2008 all over again. Can you stomach it?

No, you can't stand it. Nor can you explain it, follow it, track it, quantify it or tolerate it. A day when equity markets slide 2, 3 or 4 percent is followed by days when they surge, soar or promise that a new bull market is around the corner. And then comes the nose-dive again, another day when selling begets more selling, which contributes to panic and wonder. It churns the inside.

Can the old finance texts explain it? Can market watchers and pundits project it? Many think they do. Do hedge funds and high-frequency traders profit from it? Certainly they try. Are hedge funds and high-frequency traders responsible for it? They certainly contribute to it. Do technical trend-followers try to quantify it or forecast it? Yes, when they unveil graphs, present variance analyses, or analyze "VIX" (market-volatility) indices.

Often over the past two months, it has felt like 2008-09, like 1999-2001 when technical stocks bounced around and then burst, like 1998 when the collapse off Long-Term Capital caused a month or two of panic, or even like the long-ago days after crash of 1987.

Everybody has a reason to explain volatility. Many say they can see it coming. Not many, however, agree on the specific causes. Others quietly try to make money from it. Others are squeamish, and yet others bolt.

The suspected causes are as broad as the number of market participants. The most common blame is uncertainty. Markets are engulfed in too many unknowns about where the economy is heading and how companies will fare in uncertain conditions. Amid widespread uncertainty, market participants separately try to determine what economic trend is dominant. And the outcome might be violent swings in market values.

Others blame high-frequency traders, the large segment of traders who buy and sell thousands (millions?) of shares electronically in time frames measured by seconds. They don't value companies, project cash flows, or analyze the long-term fortunes of companies. They use technology prowess to get in and get out, faster than all other participants--including mom and pop on Main Street.

Among themselves, they race to see who can respond and act on market signals most quickly. They buy in certain markets and geographies and sell in others. They buy options in one market, sell equities in another. To them, a decline in profitability at a manufacturer because of an increase in costs of raw materials doesn't matter. They look for signals, trends, and momentum. And often they replicate the activity or trading patterns of their peers and competitors (a phenomenon now known as "crowded trades"). If one is selling, others do, too, and an equity market dives 2 percent without reason.

Panic among retail investors contributes to volatility. They call their financial consultants to order them to sell because they can't bear the fluctuations. How often have we heard when seasoned investors give up on stock investing and send instructions in sell all equity holdings immediately, so they can sleep better at night?

Why wouldn't a succession of hundred-point declines in markets cause even the most experienced investor to give up? Who wouldn't feel the urge to sell and reduce all risks when portfolios in 2008 plunged by 20-plus percent?

One segment blames short-sellers. Short-sellers do exist. Not necessarily those who sell equities short as a hedge for a long-term portfolio of stocks, but those funds and traders whose primary purpose is to investigate and analyze the bad fortunes of companies and profit from a possible decline in their stock values. Some say short-sellers spur doomsday moods by broadcasting the vulnerabilities or downturns of companies, which lead to sell-offs. Meanwhile, they quietly profit from such declines after establishing short positions.

The continual effort to guess at or measure what government entities or regulators are thinking or will say, do, enact, or support (or what they won't do) contributes to wild swings in markets. All the guessing leads to conflicting views about whether to buy or sell.

In the past decade or so, leveraged hedge funds will swear they don't contribute to volatility. But whn they must sell assets to reduce borrowings, they often must sell the most liquid assets (Treasuries and exchange-traded equities) to raise cash. As a result, they contribute to sell-offs in markets.

Traders, investment managers and economists now agree there exists something called world-wide contagion: What happens in Greece has impact on markets in Chicago and New York. What happens in Tokyo influences activity in the U.S.--for many reasons. Economies and markets are intertwined. Companies have global operations and sell in global markets. Investors and traders have diversified portfolios with exposures around the globe. When they buy or sell equities and sniff out opportunities or fear downturns, they have their eyeballs on emerging markets, as much as they watch trends in the U.S. and Europe.

What is the long-term impact of all this market madness? How will we learn to handle market turbulence, occasional market panic, and unrelenting uncertainty?

Others wait it out. They return when measured or observed volatility (from, say, "VIX" indices and the like) decline to tolerable, bearable levels. They jump back in when market swings can be rationalized, explained or when market indices follow a pattern.

And often in the long term, memories tend to be short. When confidence and a degree of certainty are reintroduced, market participants (investors, traders, researchers and mom and pop) somehow tend to forget treacherous days and once again set off to chase opportunity and profits.

Thursday, September 8, 2011

After the great depression, in 1936, John Maynard Keynes argued that should the government play a significant role to steer the economy out of recession through public spending, they would not have had a prolonged recession.

In Keynes' 1936 article, "The General Theory of Employment, Interest and Money", he argued that the solution to the Great Depression was to stimulate the economy through public spending such as government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a series of chain reactions, whose total increase in economic activity is a multiple of the original investment.

This is a wonderful concept and many politician applied this economic model through "stimulus packages" during the recent financial crisis, Barrack Obama for one is a firm believer who has trashed trillion of dollars into the US economy, Malaysia - RM60b, Australia - A$42b and many more. The results? These economies have a V-shaped recovery but looks like it's only temporary and many economists are projecting a double-dip recession. So what went wrong with this wonderful Keynesian model?

After Keynes passed away in 1946, Milton Friedman (Monetarist theory) criticized vigorously that Keynesian model did not work well post World War 2 and that Keynesian policy led the country into stagflation (high inflation and high unemployment), which they did during the early 1970's and further deteriorated in 1973 the oil crisis.

In 1942, during the World War 2, Keynes published an article, titled "How to Pay for the War", he suggested that the war effort should be largely financed by higher taxes and compoulsory savings, rather than deficit spending in order to avoid inflation. However, the deficit as a percentage of GDP was as high as 30% per year during that time under the hands of President Roosevelt which planted the seeds for the major economic problems the Americans are facing now.

People may have twisted Keynesian theory a little by saying it's not working but they did not understand that Keynes advocate prudent spending. What is not working is the lack of disciplinary action by the country leaders who are afraid of losing popular votes by taking the easy way out.

In any economic models, there are strengths and weaknesses. Personally, I'm the the follower for Keynesian model. Despite the fact that this model violates Adam Smith "invisible hands" theory which is essential for any capitalist economic system, but if we look around those successful economies, they actually have a stint in socialism!

Finally, in answering the question whether Keynesian model works for the US? Well, Warren Buffett has mentioned about tax raise, but I think maybe some forced savings like our EPF system maybe a good start for them.

Friday, September 2, 2011

Secular bull market may lasts for decades. If you buy gold in 2001 and hold till 2011, the appreciation is 700% in 10 years! This is not much compared to the gold bubble in 1980. If you buy and hold gold from 1976 to 1980, your gain would be 850% as the gold price rose from $100 to 850 per oz within 4 years time. However, we must acknowledge that any market operates with bulls and bears. From the above gold chart, after the crash in 1980, the gold market was in a secular bear for 20 years!

What drives gold price? Besides the demand and supply, gold is a barometer for inflation, global currency devaluation or simply put, the public confidence of the state of the economy. In general, when people have lose confidence with their currencies due to over printing of money or inflation, paper money depreciates and many would turn to assets such as stocks, properties and of course gold and silver!

How far the gold price goes depends on people's expectations, politics, economic condition, wars and many factors. There are 2 groups of people here: the goldbugs or the gold lovers who believe that gold represents protection from economic and financial chaos, and political and financial conservatism and they feel secure to own some gold.

The other group is the opposite, they do not think gold is a good investment as they believe gold does not pay dividends, nor does it represent ownership in a company. It's value is strictly tied to what investors are currently willing to pay for it. As long as there are more goldbugs willing to pay for the price, the gold price will continue to rally until the price is so high that buyers are not willing to pay for the extraordinary price. Technically, you'll see the volume declining as the price rises at the top of the bubble and the gold price is deemed for a crash.

When will it be? Maybe next year, maybe 5 years later, nobody knows. However, if you see your friends who have never invested in anything but decided to buy gold suddenly, that's the sign! But for now, I know the sentiment about the gold is still bullish.

Thursday, September 1, 2011

Does investment banking still have the same attraction? Do MBA students still swarm toward investment-banking roles? Do many have dreams of joining a top firm, hitting the ground running doing deals and anticipating big year-end bonuses?

After the industry turmoil and a series of setbacks and embarrassments, is investment banking still a hot area?

There have been upheaval, backlash and calls for reform since Lehman Brothers and Bear Stearns disappeared from the scene. Yet since 2008, trends suggest (a) i-banking is still attractive to many MBA students in finance at top schools and (b) the industry has evolved, but not yet gone through the major overhaul and transformation many predicted or hoped for.

Despite public pleas for changes in how banks conduct business and pay bankers and despite sluggish economic recovery and stomach-churning markets, deals are getting done. Companies are going public, issuing long-term debt, or acquiring other companies. Not necessarily at levels from 2006-07, but there is activity, enough so for banks to continue recruiting and for MBAs to pursue careers.

In this year's entering class of Consortium MBAs, at least 90 new students (about a third) have indicated an interest in finance--a number that is about the same or slightly higher from previous years. Of the 90, as many as 30 (about 10 percent of all Consortium students) have expressed a specific interest in investment banking, corporate banking or corporate finance. The actual number interested in i-banking could be higher, as many students will indicate a general interest in financial services, but have not yet acknowledged an interest in banking.

(Ten students say they are interested in investment managent, and a handful express specific interests in media finance, private equity, venture capital or real estate.)

Most students understand they will probably revise plans as they proceed through a grinding recruiting process. Banks, as they did before, put prospects through rounds of interviews, including tough technical sessions. Some students don't survive the process. Some change their minds, while others switch to other industries. Some become even more charged with enthusiasm about i-banking.

Interest in i-banking, therefore, has not disappeared. The actual number that will be recruited and hired in 2012 has yet to be determined, especially as banks struggle to make sense of this summer of volatility and uncertainty. Those who are committed and will pursue banking will encounter an evolving industry, but one that reflects familiar traditions and practices.

Over the past three years, the players and leading firms have changed. The sudden departure of Lehman and Bear Stearns and the absoprtion of Merrill Lynch by Bank of America left gaping holes in the "bulge bracket" lists. Goldman Sachs, JPMorgan, and Morgan Stanley continue to jockey for the top spots in equity and bond finance and merger activity. However, foreign banks, especially international banks with large investment-banking operations, have shoved themselves into the big picture: UBS, Deutsche, RBC, and of course Barclays, which bought the U.S. operations of Lehman.

Firms like Jefferies and Lazard Freres, once comfortable in their own mid-tier niches, took advantage of industry shake-out and expanded their reach and business. Jefferies is a more diversified, comprehensive bank than it was a decade ago. Some regionals--mostly the i-banking units of commercial banks--have also stepped up where they could.

Smaller "boutique" firms have picked up pieces and grabbed business that bulge-bracket firms once kept among themselves. Bulge brackets are now "bank holding companies," subject to banking oversight by the Federal Reserve an often weighed down--in their eyes--by onerous capital requirements and ominous regulation.

As with all banks, bulge brackets must address a laundry list of issues since TARP rolled out in 2008. Dodd-Frank regulation will force them re-engineer their businesses. They can no longer rely on surges in trading revenues to offset the cyclicality of i-banking. While big banks tend to internal restructuring and worry about declining returns, boutiques have slipped in and swiped a few lucrative deals away from them.

Boutiques absorbed experienced bankers who were dismissed by bulge brackets let go or were demoralized by the crisis. The new bankers brought clients, deals, relationships and junior staff with them. Boutiques, meanwhile, have remained steadfast in being experts in special areas (M&A, media finance, technology finance, restructuring, capital-raising, or strategic advisory).

They didn't venture to foreign lands or create hard-to-manage bureaucracies and processes. And they seldom need to scratch their heads managing conflicts of interests, "tail" risks, or burdensome capital requirements. They just do deals.

And they've done more than their share over the past year. Centerview and Qatalyst, boutique banks, had primary advisory roles in the recently announced Google-Motorola merger. Sandler O'Neill, adamant about remaining small, is one of the top banks for financial institutions. Moelis, Evercore, Allen & Co., Greenhill, Keefe Bruyette, and Perella Weingberg are all respected, if not envied, players.

Some challenges and issues continue to stifle firms these days, big and small--enough to frustrate senior managers and deal-doers who wish they could focus on clients and deals and enough to discourage some MBAs from pursuing a career.

The turtle-crawl economic recovery has a direct bearing on i-banking activity. Corporations are reluctant to grow their busineses or consider acquisitions. They hesitate to issue new capital (debt or equity) to invest in new business or innovative products. They let cash reserves sit around because they are engulfed in uncertainty. In the end, investment banks can't convince corporate CFOs or CEOs to take their advice or proceed with financings that at least make sense in Excel spreadsheets. Deals ready to go to market are suddenly shelved.

Thus, fees and revenues from mergers, acquisitions, underwritings, lending, and new products fluctuate unpredictably, while senior bankers figure out how to endure uncertainty and MBAs ponder whether they should pursue a dream.

Pending regulation and reform are looming challenges. Banks try to interpret new rules and anticipate what they will be once regulators write them up more formally. Then they huddle in backrooms to reorganize their business to make them operate profitably with the new restrictions. The 25% return on equity some bulge brackets could count on in the glory days of the mid-2000s or late 1990s might become an unreasonable target. Disgruntled shareholders may need to become accustomed to, at best, 15% returns under new models.

Risk management at all banks has gotten much attention. Banks have increased risk staff and force deal-doers to assess, probe, analyze, and measure the worst-case risks in doing a deal or bring in a new client. Risk-vs.-reward exercises are more prominent than ever.

Derivatives once attracted Ph.d. graduates and quant jocks and spawned floods of profits over the past decade or so. Going forward, regulation will force most of them to be traded on exchanges and through designated dealers. Investment banks aren't sure what the new profit dynamics will be or whether it will be worth the effort to encourage quant jocks to create new forms of them. Quant jocks aren't sure they will be welcome or will flee to hedge funds. I-bankers haven't yet figured out what they should say to clients on a consistent basis.

Work-life balance in the industry was supposed to have improved, if only to attract graduates who fear that lower bonus payouts in the future won't make it worth spending 12-14-hour days in the office, six days a week. Anecdotes suggest work-life balance is often discussed and mulled over, but when deals must be done, it's back to back-breaking, suffocating hours in the office.

The current environment with uncertainfy, regulation, and dwindling profitability will add more pressure to bankers to find new clients, win more mandates and get more deals done. Expectations by management and the public have risen the past three years. Competition from other banks is just as fierce, and clients are demanding more from banks. The pressure has not waned.

Yet the attraction to i-banking is still apparent. Despite the nervous environment, Consortium numbers suggest new students still want a shot at doing deals, helping clients borrow money or go public, or advising them on how to expand and grow.

The adrenaline from participating in a headline-grabbing transaction or a billion-dollar bond issue still exists. The satisfaction of deriving and negotiating the fair value of a targeted firm is still there. The thrill in traveling all over the country or globe to meet new clients in new industries continues. Of course, compensation--even if it has become as volatile as markets--is generally still attractive.

One tradition has not changed. I-bank recruiting and the campaign to win a spot on a bank's interview list start the first week MBAs get to campus. Those who have ambitions of securing a spot in 2012 must get going now.